Thursday, April 10, 2008

3.65 Billion BBLs, That's How Much

The USGS has estimated mean recoverable reserves of 3.65 billion bbls, and the estimate does not cover the Canadian portion of the Bakken. The assessment was based on geological elements that include: "(1) source rock distribution, thickness, organic richness, maturation petroleum generation, and migration; (2) reservoir rock type (conventional or continuous), distribution and quality; and (3) character of types and time of formation with respect to petroleum generation and migration. Detailed framework studies in stratigraphy and structural and the modeling of petroleum geochemistry, combined with historical exploration and production analyses" were also used.

The most important elements used in their geologic model were "(1) the geographic extent of the Bakken Formation oil generation window; (2) the occurrence and distribution of vertical and horizontal fractures; and (3) the matrix porosity within the middle sandstone member." Thus, it appears that the area where the Bakken has generated oil was divided into five separate assessment areas based on what appears to be somewhat comparable geologic characteristics of mainly the middle Bakken member. That consideration appears to be based on the fracturing and porosity present in those areas.

After challenging someone to show where there were more than one billion of recoverables in ND for months and getting no response, I feel pretty foolish for throwing out a 20 billion bbl number last night for the entire Bakken.

From the Dickinson Press:

Mike Armstrong, president of Dickinson-based Armstrong Corp., an oil and gas prospecting firm, said he was excited to hear the news but gave a skeptical reaction to the report. “How about this: Don’t over react,” Armstrong said. “A study is just that, it’s a study. There’s no guarantees.” Armstrong, who’s been in the oil business since 1975, said he thinks the report’s figure is an over-estimate. “I think they’re stretching it – a lot,” Armstrong said.

57 comments:

The Bakken is the largest accumulation of oil in the lower 48, according to the USGS report today. That's a big deal.

(As far as the assessment #s, they always seem low, and ten years from now it will probably be revised upward by a factor of 25 to 50 again after big oil gains their foothold...the geographic limits should also expand as new wells are drilled in those areas.)

I was hoping that this long awaited report was to be a thorough discussion of Dr. Price's methodology, why his work was or was not used to develop estimates of oil in place volumes, and a description of the process that was used to develop estimates of the fraction recoverable. I have little confidance that the USGS did any kind of rigourous analysis of the fraction which might be recoverable, methods used to make these estimates for conventional (ie permeable sands, aquifer-bounded etc) are not valid for unconventional systems such as Bakken. On the other hand, USGS probably has pretty thorough estimates of oil in place...This is the information that I was looking forward to. I see this little fact sheet as the combination of good (probably) estimate of oil-in place multiplied by (what I suspect is) an arbitrary and poorly supported fraction. Since neither the fraction recoverable, nor the total in place is presented, I see no value at all to the "fact sheet"Of course, its possible that this little fact sheet is just a prelude to a more comprehensive report. if thats the case, I'll apologize to anyone I've offended

Recovery factor means something quite different for a continous system such as bakken. Its not going to be a question of how much oil can we get before our water cut brings the party to an end. It will be more a question of how much borehole can we expose to productive bakken rock before the whole excercise becomes just plain silly. You could always increase your recovery with more laterals, you could swiss cheese the whole bakken like a giant drainfield and theoretically approach 100% Its an entirely different concept

The fact that the study area is divided into six separate assessment areas necessarily implies that there is no blanket percentage factor in play here. This assessment supposedly was based on input from industry out there in the field and what results they were achieving in these different areas. Therefore, it seems likely that there were a number of percentage factors in play here, even within the six areas.

There has been only one well (non-economic) drilled so far in Stark Co., so I assume that portion of the assessment areas of which that county is part was heavily discounted in comparison to the recoverables from the Dunn and Mountrail Co portion of those areas.

So my point is that although a blanket oil in place figure may have been used for the entire assessment, (we don't know that from the data here) there were obviously different recovery percentages used in the entire study, and very likely also within the six different areas.

NDPC/industry-at-large will work to bias recovery factors lower, even in discussions with USGS, until they have the resource tied up tighter through leases and production. Call it conservative if you want - just one more reason recovery rates will continue to increase over time...

https://www.dmr.nd.gov/ndgs/Bakken/workshop/Horizontal%20Drilling%20Potential%20of%20the%20Middle%20Member%20Bakken.ppt#256,1,Horizontal Drilling Potential of the Middle Member Bakken Formation, North Dakota

It looks like a lot of people have blinders on. Outside of a few townships in Mountrail Co., how is the other 99% of the Bakken paying out? According to Bob Harms, of an industry group, only about half of the wells outside of the Mountrail sweet spot are going to pay out even with hundred dollar oil. Go out in Mckenzie, Williams and Billings Co and outside of Elm Coulee in Mt and see what you are going to find. This report is based on current reality, not some possible, unquantifiable future change in technology.

For those who think the estimate is too low, step up and tell everyone with specifics where you are going to get more. Is it all going to come from a few townships in Mountrail?

For example, moving eastward of the rich "Eastern Expulsion Threshold" and South of Parshall Field: across Dunn and Mercer County, and across Burke to the North...well into the USGS theoretical "Middle Sandstone Member" AU not currently being counted as continuous, even though it likely will be once bitmapped...

I find it interesting that the amount note is big enough to attract the national press yet not so large as to be challenged. Since most of the production information needed to put this report together actually came from the oil companies you must consider what is in their best interests.

Below is an article in todays MSN Money section.

Dakota oil: Persia on the Plains?Energy finds in North Dakota and Pennsylvania, as well as Canada, could give investors cheap, low-risk -- albeit unconventional -- entries into oil and gas now, and handsome profits later.

By Jon MarkmanWestern North Dakota and western Pennsylvania, by which I mean the middle of nowhere, are on track to become the center of the universe for energy companies over the next few years as geologists, speculators and attorneys battle for control of two of the most important and unusual oil and gas finds of the past three decades.

Before the battle is fully defined and winners are awarded the spoils, there's plenty of time for investors to make low-risk bets that could generate great returns over the next few years. There are even cheaper opportunities north of these two hot spots, in the Canadian tundra of Saskatchewan and New Brunswick, which share the same rich rock formations but have yet to attract as much interest.

It may be a little hard to believe that these forlorn areas -- far from the glamorously derrick-dotted plains of Texas, Oklahoma and California -- could yield the sort of riches that attract the diamond-studded-cowboy-hat crowd, but energy exploration has never exactly gone hand in hand with the tourist trade. So put on your mukluks and parka, get out your atlas and prepare for a visit to the Bakken and Marcellus shales.

Going deepLet's start with western North Dakota, which some in the energy business are now calling Persia on the Plains.

Ramshackle wheat and alfalfa farms up there happen to lie atop the juiciest zone of the underground Bakken Formation, which stretches across 200,000 square miles of Montana and Saskatchewan as well. The heart of the Bakken, which contains three layers of shale that formed when the area was covered with relatively deep ocean, is about 2 miles down.

The rock was initially discovered as an oil source in the mid-1950s, but with extremely low porosity and permeability, it was impossible to exploit fully with conventional drilling techniques when oil was going for less than $50 a barrel.

In recent years however, horizontal drilling and "fractionation" extraction techniques -- invented in U.S. labs and developed in fields from Russia to Argentina -- have opened the formation, and its output is expected to expand exponentially so long as oil prices remain above $60 a barrel. Experts figure it will yield 270 million to 500 billion barrels of oil over its lifetime, which could make the roughly 60 billion barrels of oil of the famed North Slope of Alaska look like a child's mud puddle.

The interest has grown only recently as major producers such as EOG Resources (EOG, news, msgs) of Houston have announced major finds, making the folks who finance these sorts of high-risk ventures think they've got another huge winner on their hands.

It wasn't long ago that so-called unconventional fields were considered uneconomic. Now these underdogs are the center of the show, as the unconventional Barnett Shale in Texas has unleashed gushers of cash for early developers, as has the Pinedale Anticline area of Wyoming, developed by Ultra Petroleum (UPL, news, msgs).

Just to give you an idea of how this can affect a stock, back in 2001-03, one of my energy-biz sources, David Anderson of Palo Alto Investors, was regularly talking about Ultra's potential. At the time, it was just another $2-a-share energy stock that had a hard time convincing investors it could make much of its large stake in unconventional acreage. Now that it's up something like 4,000%, nobody's skeptical anymore. All an exploration company has to do now to demand multibillion-dollar valuation is announce a legitimate claim to 20,000 acres in the Barnett, Fayetteville and now Bakken shales.

Video: Can the US kick its oil habit?

That's essentially what Continental Resources (CLR, news, msgs), has done: The Bakken player went public at $14 a share last May and has more than doubled, putting its market capitalization more than $5 billion. Showing its marketing savvy, it has the words "unconventional exploration" as a big headline right on its Web home page. And like most energy companies of its type, it's probably still dirt cheap, pardon the expression, trading at a price-to-earnings ratio of 10 on 2009 estimates despite income growth that's likely to top 22%.

Other major drillers in the Bakken are Brigham Exploration (BEXP, news, msgs), Whiting Petroleum (WLL, news, msgs), St. Mary Land & Exploration (SM, news, msgs) and tiny Northern Oil and Gas (NOG, news, msgs). Earlier this week, Northern Oil saw its shares shoot up 6% in a day after announcing its fifth discovery as a minority partner on a Bakken project -- in this case a well in the remote badlands of Dunn County, N.D., population 3,000. In a sure sign of boom times, that news was worth $15 million to shareholders before the well has produced any oil.

Before you guys drown in pessimism over this report, how many oil wells have actually been drilled outside of Mountrail and now Dunn counties that use the latest technologies that involve laterals a mile or more long and fracing using sand under pressure. How can anyone possibly conclude that the technologies being employed in current Mountrail and Dunn County wells to bring in strong production will not ultimately work in all sorts of other places in the Bakken?

We should get our first clues as some of the spacings in the old Stanley vertical well field is redrilled using laterals and fracing.

BISMARCK, North Dakota (AP) - The U.S. government estimated Thursday that up to 4.3 billion barrels of oil can be recovered from the Bakken shale formation in North Dakota and Montana, using current technology.

The U.S. Geological Survey called it the largest continuous oil accumulation it has ever assessed.

The Bakken Formation encompasses some 25,000 square miles (64,750 sq. kilometers) in North Dakota, Montana, Saskatchewan and Manitoba, in three layers. About two-thirds of the acreage is in western North Dakota, where the oil is trapped in a thin layer of dense rock nearly two miles (3 kilometers) beneath the surface. Companies use pressurized fluid and sand to break pores in the rock and prop them open to recover the oil.

North Dakota's entire oil production hit 137,000 barrels a day in January, the latest figures available. Industry officials believe the state's record production of 148,500 barrels a day, set in 1984, will be surpassed this year.

Donald Kessel, vice president of Houston-based Murex Petroleum Corp., said he believes the Geological Survey's assessment of how much oil can be recovered in the Bakken may be a little on the high side.

"That's a lot of zeros,'' Kessel said Thursday.

Kessel said his company was the first to get a producing well in the Bakken in North Dakota three years ago. The company now has about 20 producing wells.

The report released Thursday by USGS was done at the request of Democratic Sen. Byron Dorgan over the past 18 months.

A 1995 study by the USGS found 151 million barrels of oil could be recovered from the Bakken using technology at that time. "This is great news,'' Dorgan said of the new report. "This is 25 times the amount of the previous assessment.''

Oilmen have known for more than 50 years that the Bakken holds vast oil reserves, Kessel said. But the price has never pushed demand high enough to develop technology to capture the oil, he said.

According to Jim Ehrets, a Denver-based geologist with Headington Oil Co., of Dallas, it costs about $5 million (euro3.15 million) to drill a well tapping the middle Bakken, and companies need crude prices of at least $50 a barrel to make it economical. Even with crude prices now double that, "there still is a ton of risk,'' he said.

Oil companies began sharing technology about two years ago on how to recover the oil. The technology involves drilling vertically to about 10,000 feet (3,048 meters), then "kicking out'' for as many feet horizontally, while fracturing the rock to release the oil trapped in microscopic pores in the area known as the "middle'' Bakken.

Initially, companies had kept their technology secret, said Ehrets.

"Everybody was protecting their results while the lease play was still going on,'' he said. "Once it had been pretty well saturated and not much left to lease, there was cooperation in sharing information.

"I can't remember in my entire career that kind of cooperation,'' said Ehrets, an oil man for nearly 30 years.

Headington, which is based in Dallas, has about 150 wells working in the Bakken - about 100 of them in Montana - with plans to drill at least 100 more, Ehrets said.

The Geological Survey said about 105 million barrels of oil have been produced from the Bakken through last year. The Elm Coulee oil field in eastern Montana, near the North Dakota border, has produced about 65 million barrels of the total, said Rich Pollastro, a USGS geologist.

The Elm Coulee field was discovered in 2000, he said.

The study released Thursday by USGS does not estimate how much oil may be in the Bakken - only what the agency believes can be recovered using current technology.

Thursday's report did not cover the Canadian portion of the Bakken. Pollastro said a 2000 assessment found only about 15 million barrels of recoverable oil in that area using traditional vertical drilling.

Ron Ness, president of the North Dakota Petroleum Council, said the number of wells in the Bakken in North Dakota increased from about 300 in 2006 to 457 at the end of last year.-AP

It will be a long time before the eastern fringes such as Mercer County will be explored.

Mountrail County is the known hot spot for the Bakken. Mountrail County has 1,824 sections of land.

As of the end of March 2008 there have been 113 Bakken wells drilled in Mountrail County covering 140 sections.

That leaves 1,684 sections in the known hot spot that are still undrilled. If half of the future wells are on one section spacing and the other half are on two section spacing, the oil companies will need to put 1,263 more holes in the ground in Mountrail County before the currently known hot spot is fully explored.

The drillers have until 2012 to complete the wells in Mountrail County otherwise they start forfeiting their leases.

I noticed that Brigham Exploration Company was actively gathering leases in Mercer county during the last mineral auction in February. Given this was an oil & gas company rather than just some speculator would seem encouraging.

Mercer county also had some reasonably impressive results (around a $100 bonus on average). This would suggest (at least to me) there will be some activity in the next 5 years.

What is the 'layman' geological explanation for an area, such as western Mercer County, to be outside the eastern assessmetnt area? Do you anticipate these boundary outlines to change in the near future as drilling intensfies in the eastern Dunn county area?

It turns out that of 14 counties in the Feb. State lease auction, more than half (55%) of the total proceeds went for Mercer County acreage. Also third parties bidding on behalf of some of the larger oil co's.

My wife has an oil lease in T.153 R.91 in Montrail County. The lease is set to expire in August 2010. I am curious about Larry's comments concerning leases being forfeted in 2012. Also am curious where the data comes from to determine that there will be 113 wells in the county on 140 sections by year end.

If a oil company does not permit to drill on a proposed tract in the leases life, The minerals are once again freed up to be leased again to whomever. (They have options as well that could tie up your lease for another 2 to 3 years past your 2010 date) And if you read his comment again youll see that there are 113 wells on 140 sections as of now.

Doug,Most of the acreage in Mountrail County was leased in 2005,2006, and 2007 under five year terms. If drillers have not found oil on a lease within the five year term, the lease expires and the mineral rights owner can lease it again at perhaps a much higher price. Thus, the drillers have a big incentive to explore all of their leases, particularly in a hot spot area like Mountrail County.

Its been awhile now since we have had anything come out on new well results. Looking forward to seeing something to spark things now that the market seems to be paying very close attention to the players in the Bakken

In looking at the production of many of the Bakken wells in Dunn County it looks like quite a few have settled into the 100 to 150 barrels per day on single laterals. Is this economical and will the oil companies continue to drill? This really goes to the whole how much oil is commercially available in the Bakken debate.

some one posted that the Behm/Edwards was a dry hole. they started spudding Feb,11. drilling and completion would take about 80 days. it's been 64 days since spudding. so how could some say it was a dry hole. when there not even completed it yet. Larry or David any thoughts on this. thanks...

If it's a dry hole, there is no time needed for "completion" since it would be plugged, which is a few hours of rig time. The drilling of the well alone is only about a month, which is the only relevant time if it's a dry hole.

I see Whitings proposal in there new presentation, and am glad to see at last whos going to drill some of my interests. Any inside info. about the pipeline there building along #8 and the Robinson Lake Gasplant. Its surely needed.

Since 1984, geologists and engineers have estimated the generated oil in the Bakken from32 to 92 to 132 to 200 to 300 billion barrels. Dr. Leigh Priceof the USGS placed the average at413 BBbls. All of these mean a huge amount of original oil in place in the Bakken. The "trillion dollar question" is how much of this oil is economically recoverable? The recent USGS estimate of3.65 BBbls is only 1.2% of the300 BBbl 2006 computer model (Flannery & Kraus). Even the lowerestimates mean only 3 to 4% the oil will likely be recovered; i.e. 96% plus will be left in zone. My point is, these are onlyestimates and if they vary only by1 or 2% the quanity of oil ultimately recovered will changeby BILLIONS of barrels! The USGS is wisely taking aconservative approach by startinglow and then let technolgoy pushthe totals higher. It is always easier to advance than retreat! The potential is huge. If oil prices stay above $50 and technology and understanding ofthe basin conintues to improve, the 3.6 to 4.3 BBbls is likey go higher. Also, we need to remember,there are about ten other oil producing formations which will continue to add to the value ofthe Williston Basin. The drill bit will give us the answers.

What are your thoughts will the oil compaines will continue to drill in Dunn Co ? It appears in the production reports that quite a few of the wells are running around 100 to 150 barrels per day. Are they drilling these to hold the minerals with the hope of recovering more with improved technologies ? If so is this a big bet ?

Even though many of the wells have been coming in higher in Mountrail, a well that settles in at 100 barrels/day represents a pretty good payback for the working interests....say 3000 bbls per month times say $85.00/bbl times 80% (assuming a 20% royalty burden---Hess,for example, must have a lot of 12.5% royalty burden)..that's a net of $204,000 per month...back off some production taxes and several thousand per month for well operating costs...the working interests are getting their investment back in two years...still not bad...a 100 bbl well is a keeper....overall they need to do better on average, due to other corporate costs and overhead...even so, that 100 bbl. well represents a lot of revenue for the working interests and for the royalty owners. The state of ND will do just fine also, considering the income taxes paid by the workers and by the operators and the royalty interests.....and the production taxes...5%...later 11.5% maybe...after the initial holiday on Bakken horizontals...In any event, a string of 100 bbl wells in any county would be a terrific economic boost.

Speaking of discounts, it's interesting how the risk-free discount rate being used in DCF break-even analysis models is around 10%, when it should be 4% or less right now.

(Take BEXP for example, showing their latest break-evens at 158M BBLs for wells being drilled in the Bakken. Change the discount rate to what it should be, and the break even is only about half that...)

3.65 billion barrels not inclucing the Canadian side. At 83 million barrels a day world wide comsumption, that is 45 days' supply from the U.S. part. Or if we just save it for the U.S, it is 182 days' supply.Even if the Canadian section is twice as large, and we grab it all, using it all just for ourselves, it will last 1.5 years.

having spoken with some professional oil men from Canada. they stated, the setback is rather a joke, as they can drill on all four sides of your land, setback in force, and fracture all about. and then, pull all the oil out from under your land, and suck all the oil out of your mineral claim. when I said, isnt that like robbing the mineral holder in the center of this development ? they answered, "YES", it will pull almost the entire claims oil out. thus, you lose, and get paid, NOTHING !